Precious Metals

     

 

 

The Technical Picture – a Comparison of Antecedents

We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of late. In light of past experience, such market behavior certainly deserves to be scrutinized. We felt reminded of another occasion though, when a negative divergence prompted a flood of mails to us as well (not every divergence does).

 

The HUI compared to gold. It is a good rule of thumb that positive divergences between the HUI and gold are bullish signals and negative divergences are bearish signals. Also, gold stocks should ideally lead gold in order to confirm the prevailing trend. They should be strong relative to gold in uptrends and weak relative to gold in downtrends. As you can see above though, not every negative divergence is meaningful. It can even turn out to be a major misdirection, as happened in early 2016. We published a great many posts  on the sector between August and December of 2015, stressing that we felt a great opportunity was at hand. The brief break of support in January 2016, coupled with a negative divergence,  prompted many people to write in and express concern – click to enlarge.

 

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Silver Is Pushed Up Again

This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.

 

Taking off for real or not?

Photo credit: NASA

 

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Gold and Silver Divergence – Precious Metals Supply and Demand

Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising.

Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it so.

 

Stalin regarded Pavlov’s psychological theories as compatible with Marxism and “dialectic materialism”. Soviet psychologists who championed competing concepts were reportedly often declared insane and involuntarily committed to a booby hatch. Pavlov meanwhile kept a secret stash of silver bars under the table in his lab, which his dog had conditioned him to buy (see photographic evidence of this counter-revolutionary activity above). [PT] – click to enlarge.

 

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Silver Gets Frisky

Last week, the prices of the metals had been up Sunday night but were slowly sliding all week — until Friday at 7:00am Arizona time (14:00 in London). Then the price of silver took off like a silver-speculator-fueled-rocket. It went from $16.68 to $17.25, or 3.4% in two hours.

 

March Silver, 30 min. candles. Someone certainly piled in last Friday… – click to enlarge.

 

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Rekindling the Dollar Debasement Strategy

The U.S. dollar, as measured by the dollar index, has generally gone up since mid-2014. The dollar index goes up when the U.S. dollar gains strength (value) against a basket of currencies, including the euro, yen, pound, and several others. Conversely, the dollar index goes down when the U.S. dollar loses value.

 

The US dollar has been quite strong since retesting its previous lows in 2011 (note that it has been even stronger against many currencies not included in DXY). Politicians and central bankers never seem to be content with a strong currency. This is quite bizarre, as a strong currency greatly benefits consumers, i.e., everyone. Politicians seem to believe it is better to create currency-related benefits for what is really only a small sector of the economy – which proves how deeply ingrained mercantilist fallacies are. Ironically, even these beneficiaries only ever see a temporary bump in their income and as a rule tend to suffer great harm in the long term. Just ponder US car companies in this context. Over many decades, no other sector has been whining more persistently about the allegedly unfair weakening of the yen by Japan’s government. The reality is this: in 1965, the yen stood at nearly 360 to the dollar. 30 years later, it had risen to 80, a gain of 350% – or putting it differently, the dollar declined by 78% against the yen in three decades. Have US car companies conquered the world as a result? Have Japan’s car makers lost market share in the US or elsewhere? The exact opposite has in fact happened (two of the US “big three” even went bankrupt and had to be bailed out). Ultimately, the magic elixir of currency debasement achieves none of the results promised by its promoters – click to enlarge.

 

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Currency Debasement Doesn’t Make Anyone Richer

The action favored bettors this holiday-shortened week (Monday was Martin Luther King day in the US), with the price of gold up 13 bucks and silver up 26 cents.

We noticed a worrisome remark by newly inaugurated President Trump. The strong dollar of the past 20 years, he said, is not good for American competitiveness. Let’s just tackle this straight on. Actually, we will address three distinct issues.

 

President Trump and his advisor Anthony Scaramucci apparently have discovered the “advantages” of currency devaluation. The only problem with that is that such advantages don’t exist, at least not for society at large. As is always the case when money is debased, there is a small group that will benefit to the detriment of everybody else in the economy. However, in the case of currency debasement, even this group (primarily the export sector) will enjoy only temporary benefits at best. Eventually, domestic prices will adjust to the devaluation, and then many exporters will find themselves in a worse situation than before [PT]

Photo credit: AP

 

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Rising Scarcity and a Nascent Change in Trend

Last month, we noted that there could be a trend change in progress. Not only are the prices of the metals rising (which is just a mirror-image of the dollar falling, from 27.6 milligrams of gold just before Christmas to currently under 26mg). But the scarcity of gold as we measure it, using the spread between the price of gold in the spot and futures markets, has been rising.

 

All the gold in the world (excluding Ben Bernanke’s grillz collection). The estimate appears a bit dated, but even if we e.g. assume that there are  about 180,000 tons of mined gold in the world, the cube would only be slightly larger (approx. 20.5 by 20.5 meters, or 67.25 by 67.25 feet).  There is actually considerable uncertainty regarding the total amount of gold mined in the course of history, but the fact remains that it is quite rare. At the same time, its existing stock is very large compared to the flow of new gold supplied by mines every year. The large stock and only slowly growing stock is one of several reasons why the market has chosen gold as money. [PT]

 

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Supply-Demand Fundamentals Improve Noticeably

Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.

 

Photo via thedailycoin.org

 

The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.

 

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Sentiment Extremes

Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold’s fundamental drivers aren’t yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.

 

Blackbeard’s treasure chest.

 

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Deutsche Bank Caves In

 

Deutsche Bank trader: “u just said u sold on fix.”

Answer UBS trader: “yeah, we smashed it good.”

 

Deutsche Bank is a defendant in more than 7,000 lawsuits worldwide. In two of them it has recently agreed to settlements and is prepared to pay tens of millions of US dollars in restitution and fines. This includes the settling of lawsuits over gold and silver price manipulation. Associated court proceedings against other financial institutions are still underway.

 

It has been said that precious metal bars make for good door stops due to their high specific gravity. Perhaps, but as DB has just found out, it also means that stubbing one’s toes on them can be painful [PT].

Photo credit: Perth Mint

 

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Rate Hike Heeded by Gold, Ignored by Stocks

The price action was not what most of those in the gold community hoped for (or predicted). The price of gold dropped another $24 and that of silver nearly a whole dollar.

 

Observing the stock market triggers all sort of reactions….

Cartoon by Bob Rich

 

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Long Term Seasonal Price Trends

Prices in financial and commodity markets are exhibiting seasonal trends. This applies to the precious metals gold, silver, platinum and palladium as well.

 

Platinum Crystal, image via shapeways.com

 

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